The forecasting power of short-term options

Carlo Sala is and Associate Professor of Finance at the Department of Economics at ESADE Business School. We are delighted to welcome him to this years QuantMinds International 2022, and even more delighted to be able to share some of his research ahead of his session on "The forecasting power of short-term options".  Read an abstract from the paper here and download the full paper below.

We propose robust option-implied measures of conditional volatility, skewness and kurtosis based upon quantiles and expectiles inferred from weekly options on the S&P 500. All quantities are by construction forward-looking and estimated non-parametrically through a novel robust and arbitrage-free natural smoothing spline technique that produces quick to estimate volatility smiles. We find that some of the option-implied robust indicators exhibit short-, medium- and long-term predictive ability for the U.S. equity risk premium and higher moments, both in- and out-of-sample, which outperform equal indicators inferred from historical returns.

Read the full paper here.